Understanding the Law of Demand

The question asks for the correct definition of the Law of Demand. The Law of Demand is a fundamental principle in economics that describes the relationship between the price of a good or service and the quantity demanded by consumers, assuming all other factors affecting demand remain constant.

Defining the Law of Demand

The Law of Demand states that, if all other factors remain unchanged, the higher the price of a good, the less people will demand that good. Conversely, the lower the price of a good, the more people will demand that good. This shows an inverse or negative relationship between the price and the quantity demanded.

The crucial condition is "other things remain equal" or "ceteris paribus". This means we assume factors like consumer income, tastes, prices of related goods, etc., do not change when we look at the relationship between price and quantity demanded.

Analyzing the Options

• Option 1: "Other things remain equal there is positive relation between demand of commodity and its price." This is incorrect. The Law of Demand states there is a negative or inverse relation, not a positive one.
• Option 2: "Other things changes there is equal relation between demand for a commodity and its price." This is incorrect. The Law of Demand requires "other things remain equal," and the relationship is negative, not "equal".
• Option 3: "Other things remain equal there is a negative relation between demand for a commodity and its price." This aligns perfectly with the definition of the Law of Demand, including the ceteris paribus condition and the negative relation between price and quantity demanded.
• Option 4: "Other things remain unchanged there is an equilibrium relation between demand for a commodity and its price." This is incorrect. The Law of Demand describes the relationship between price and quantity demanded along a single demand curve, not an equilibrium relationship (which involves both demand and supply). The relationship described is negative, not an equilibrium one.

Why Option 3 is Correct

Option 3 accurately captures the two key components of the Law of Demand:

1. The condition that "other things remain equal" (ceteris paribus).
2. The nature of the relationship, which is a "negative relation" between the price of a commodity and the quantity demanded. A negative relation means that as one variable (price) increases, the other variable (quantity demanded) decreases, and vice versa.

This inverse relationship is often represented graphically by a downward-sloping demand curve.

Illustrating the Inverse Relationship

Assuming other factors are constant, we can see the inverse relationship:

As the price increases from \$10 to \$30, the quantity demanded decreases from 50 units to 10 units, showing the negative relation described by the Law of Demand.

Revision Table: Law of Demand Summary

Additional Information: Ceteris Paribus and Exceptions

The ceteris paribus assumption is vital because many factors influence demand besides price. If these other factors (like income or tastes) change, the entire demand curve shifts, and we wouldn't be observing solely the effect of price changes on quantity demanded.

While the Law of Demand is generally true, there are a few theoretical exceptions, such as:

• Giffen Goods: These are rare inferior goods for which demand increases as the price increases.
• Veblen Goods: These are luxury goods for which demand increases as the price increases because consumers perceive higher prices as a sign of higher quality or status.

However, for most goods and services, the Law of Demand holds true.